RBA's Glenn Stevens says accommodative policy to stay for some more time
Six years back when RBA governor Glenn Stevens spoke at the Economic and Social Outlook Conference in Melbourne, the title was the ‘Road to Recovery’, which focussed on managing the downturn in the Australian economy in the backdrop of the global slowdown.
This time, Stevens was addressing the 'Path to Prosperity', and noted that the path didn't seem much different today from six years ago. Macroeconomic policies provide a measure of counter-cyclical stabilisation, but they couldn't serve as a magic bullet to achieve sustained growth in living standards, he said.
In the six years, the Australian economy's exposure to China had increased, so China's prospects mattered more, he said.
"The current rate of growth of the Chinese economy is uncertain, as is its future growth rate. It is likely that the marginal steel intensity of China's growth will be lower in future than in the past. At the same time, the marginal propensity of the Chinese people to consume services is rising noticeably.
"So the challenge for Australian resource producers to be the most efficient suppliers in a world of slower growth in demand for resources will co-exist with greater opportunities for other firms to offer value added in services."
He said the decline in resources sector capital spending was now roughly at the halfway stage, but nonetheless over the past year the non-mining side of the economy had generated a good number of jobs.
"The rebalancing is occurring. It isn't as seamless as it would be in an ideal world, but we don't live in such a world," he said.
"Monetary policy is contributing to that rebalancing, consistent with its mandate, with a very accommodative stance. It seems likely that an accommodative stance will be appropriate for some time yet. Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening. The rate of CPI inflation is clearly no impediment to easing.
"The housing market may be calming, lessening risks from that source, though by how much and how persistently we cannot yet know."
He said the Reserve Bank Board was faced with the question that whether the recent changes in mortgage rates result in an effective set of financial conditions that is too tight for the economy.
Over the course of 2014 and 2015, effective rates on most loans tended to decline by more than the cash rate, reflecting both declining funding costs and increased competition to lend.
"For fixed rate mortgages and many business loan rates the fall was quite marked. The average rate on outstanding business loans, for example, fell by over 90 basis points during a period in which the cash rate fell by 50 basis points. Even for floating rate mortgages, rates had fallen a bit more than the cash rate.
"The actions of those banks that have lifted mortgage rates over recent weeks reverse a little under half of this year's decline for floating rate mortgages for owner-occupiers and have no effect, at this stage, on the 15 percent of loans with fixed rates.
"For investors in housing, these actions and those a month or two earlier reverse the effects of this year's monetary policy easing but, of course, this was the lending that had been growing most quickly.
He also said a significant proportion of owner occupier households was ahead of schedule on mortgage repayments – in large part because these households did not lower their payments as interest rates fell. Most of these households are unlikely to need to part with extra cash each month as a result of the recent interest rate changes.